The Supreme Court has handed down its first class-action related opinion of the 2012-13 Term, Amgen Inc. v. Connecticut Retirement Plans & Trust Funds. And while that opinion represents a loss for the defendants in the specific case, it’s not as big a problem for securities defendants in general.
Amgen involved an alleged securities fraud committed by Amgen Inc., a biotechnology company. As the Ninth Circuit’s opinion lays out the alleged misstatements:
First, Amgen supposedly downplayed the FDA’s safety concerns about its products in advance of an FDA meeting with a group of oncologists. Second, Amgen allegedly concealed details about a clinical trial that was canceled over concerns that Amgen’s product exacerbated tumor growth in a small number of patients. Third, Amgen purportedly exaggerated the onlabel (that is, for FDA-approved uses) safety of its products. And fourth, Amgen allegedly misrepresented its marketing practices, claiming that it promoted its products solely for onlabel uses when it in fact promoted significant off-label usage, in violation of federal drug branding statutes.
Amgen moved to dismiss the case, but lost that motion. The plaintiffs then moved for certification, relying on the fraud-on-the-market theory to demonstrate classwide reliance. Amgen opposed, arguing in part that the plaintiffs had not shown that the alleged misstatements were material (a requirement the Supreme Court appeared to impose in Basic, Inc. v. Levinson). The problem was, materiality was both a "prerequisite" for fraud-on-the-market and an essential element of a 10b-5 claim. So the question the litigants (and the Court at argument) struggled with was: when do you have to prove materiality? At class certification, or on the merits?
Justice Ginsburg’s opinion is remarkably clear, from the beginning:
Contrary to Amgen’s argument, the key question in this case is not whether materiality is an essential predicate of the fraud-on-the-market theory; indisputably it is. Instead, the pivotal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members” as the litigation progresses. Fed. Rule Civ. Proc. 23(b)(3). For two reasons, the answer to this question is clearly “no.”
(Emphases added.) The first reason the Court cited was that materiality must meet an objective "reasonable investor" standard, which will not vary from class member to class member. The second reason, however, is the one that shows why the Amgen opinion should not cause securities defendants too much heartburn:
there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating. Because materiality is an essential element of a Rule 10b–5 claim, see Matrixx Initiatives, 563 U. S., at ___ (slip op., at 9), Connecticut Retirement’s failure to present sufficient evidence of materiality to defeat a summary-judgment motion or to prevail at trial would not cause individual reliance questions to overwhelm the questions common to the class.
(Emphasis added.) In other words, because of the "reasonable investor" standard for materiality, there was never a hope of showing variations there to begin with. The defendant’s hope was always in just showing that materiality did not exist. And, if the defendant can do that, it can win the case outright.
In other words, what the Supreme Court did here was to remove one option for the defendant to challenge materiality. Before Amgen, the defendant could challenge materiality at four points during the litigation:
- during a motion to dismiss (decided on a 12(b)(6) standard, but with some assistance from the PSLRA, which requires plaintiffs to plead specific facts supporting loss causation);
- during a motion for summary judgment (decided on a "no contested material facts" standard);
- during class certification (decided on a standard that ranged between "burden of persuasion" and "preponderance of the evidence" depending on the jurisdiction); or
- during trial (decided on a "preponderance of the evidence" standard).
Now, the class certification challenge is gone, but the others remain. There are sound strategic reasons to want a challenge at the certification stage, but nothing prevents the defendant from filing a summary judgment motion before certification if it believes it can win the materiality issue cleanly.
So while, at first blush it appears the Court has taken away a certification argument for the defense, what it has really done is to remind the defendant that when it has a strong merits argument to make, it should do so.